Microfinance Banana Skins 2008 - Citigroup

C S F I / New York CSFIThe The consequence is is not not just just that that MFIs are are deserting their their original social missions, but butthat that they they are are being pushed into into business areas where they they may may not not have have the the right rightskills and and management tools. This This increases the the risk risk of of business failure. It It also alsoraises the the microfinance sector’s vulnerability to to a a change investment fashions. As Asmany respondents pointed out, out, the the flood of of investment could just just as as quickly flow flow out outagain as as investors pursue a new a new fad. fad.15. FraudMFIs are reluctantto to sharefraud experienceResponses to to this this Banana Skin Skin had had a a resigned tone tone to to them: “always with with us, us, a anatural business risk, risk, manageable etc…” But But a a number of of respondents felt felt therewere worrying trends. Some commented on on the the growth of of fraud by by staff staff and and whitecollar workers, others on on the the new new possibilities for for fraud opened up up by by MFI MFI movesinto into unfamiliar markets or or by by the the introduction of of new new but but unreliable technologies.Geographically, concerns about fraud were were strongest in in Asia. It It was was also also a a leadingconcern among investors in in North America and and Europe. One One US US investor felt felt the thefraud problem was was underplayed because MFIs were were frightened of of “airing their their dirty dirtylaundry”. Their reluctance to to share fraud experience meant that that other MFIs werecondemned to to repeat their their mistakes.But But many felt felt these concerns were were overdone, and and that that the the fraud experience of of MFIswas was not not exceptional in in the the financial field. Better controls and and a a stronger anti-fraudculture were were being introduced. A A South African respondent said said that that fraud was wasbeing mitigated by by “licensing, better governance and and best best practice organisations.”The trust factorThe The present situation looks 'to 'to good good to to be be true'. true'. I I sense that that every day day we we are are comingcloser to to a a failing institution (too (too high high portfolio at at risk, risk, or more likely, fraud). How How will willthe the market react react to to this? this? At At the the same time, time, every day day without such such an an eventconfirms the the trust trust people have have in in this this sector, and and the the likelihood increases that that they theywill will stay stay on. on.Els Els BoerhofManagerMicro and and Small Enterprise Fund FundFMO FMONetherlands16. StrategyWeaknesses in in MFIs’ strategic planning are are perceived to to be be only only a a middle level level risk, risk,but but nonetheless a a rising one one (No (No 6) 6) as as the the microfinance sector becomes morecomplex and and competitive. Many respondents felt felt that that strategy could soon soon become a asurvival issue.Philippe Serres, network director of of PlaNet Rating, said said this this was was a a major risk risk “giventhat that many institutions simply do do not not know how how to to plan plan or or are are too too ambitious”. XavierReille, manager with with CGAP in in France, saw saw MFIs suffering from a a “lack of ofCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 25